Progressive Tax System and Income Equality

  The major innovation in taxation in the economy is the the creation and development of progressive tax systems which play a key role in the reduction of income inequality and support  the economy growth

     A proportional tax system, assesses tax rate to taxpayers regardless of income or wealth. It is meant to create equality between marginal tax rate and average tax rate paid. Under a this tax system, individual taxpayers pay a set percentage of their income regardless of total income earned.For example, an income tax of 10% that does not increase or decrease as income rises or falls results in a proportional tax. In this example, an individual who earns $20,000 annually pays $2,000 under a proportional tax system, while someone who earns $200,000 each year pays $20,000 in taxes. 

     The progressive tax system, assess tax liability as an individual or entity's income increases. Tax burdens are meant to be more of an imposition to wealthy, high-income earners than they are to low- or middle-class individuals.Under a progressive tax system, taxes assessed on income and business profits are based on a progressive or increasing tax rate schedule. Marginal tax rates under a progressive tax system are often higher than the average tax rates that are paid. Progressive taxes are imposed in an attempt to reduce the tax burden on people with a lower income individual than those higher income earner.

    Progressive tax system is often suggested as a way to mitigate the societal ills associated with higher income inequality, as the tax structure reduces inequality, however economists have disagree on the tax policy's and long-term effects. Progressive income tax has been positively associated with happiness, the subjective well-being of nations and citizen satisfaction with public goods, such as education and transportation.

  In the modern area,the logic of universal right that govern the development of modern fiscal state fit rather well with ideas of proportional or slightly progressive tax.However it will be wrong to conclude that progressive tax play limited role in the modern distribution of income.

   The extent of globalization, weigh particularly on the least skilled worker in the wealthy countries, a progressive tax system might in principle be justified, adding yet another layer of complexity to the overall picture. This would not only solve the problem but also  help improve the situation for the least skilled worker.This tax system ensure that everyone benefit from globalization and increasingly glaring of progressive taxation may ultimately undermine support for globalized economy.

Economic Effect

There is debate between politicians and economists over the role of tax policy in mitigating or exacerbating wealth inequality and the effects on economic growth

• Income equality

Progressive taxation has a direct effect on reducing  income inequality.This is especially true if taxation is used to fund progressive government spending such as transfer social safety. However, the effect may be muted if the higher rates cause increased tax evasion.When income inequality is low, aggregate demand will be relatively high, because more people who want ordinary consumer goods and services will be able to afford them, while the labour force will not be as relatively monopolized by the wealthy individual. High levels of income inequality can have negative effects on long-term economic growth, employment, and class conflict. Progressive taxation is often suggested as a way to mitigate the societal ills associated with higher income inequality.

• Economic growth

A report published by the OECD in 2008 suggest a negative relationship between the progressivity of taxes and economic growth. They argues that progressivity can undermine investment, risk-taking, entrepreneurship, and productivity because high-income earners tend to do much of the saving, investing, risk-taking, and high-productivity labor.

• Educational attainment

Progressive tax rates have the goal and corresponding effect of reducing the burden on lower income people, improving income inequality. Educational attainment is often conditional on cost and family income, which for the poor, reduces their opportunity for educational attainment. Increases in income for the poor and economic equality reduces the  inequality of educational attainment. Tax policy can also include progressive features that provide tax incentive for education, such as  tax credit and tax exemption, for scholarship and grant 

A potentially adverse effect of progressive tax schedules is that they may reduce the incentives for educational attainment. By reducing the after-tax income of highly educated workers, progressive taxes can reduce the incentives for citizens to attain education, thereby lowering the overall level of human capital in an economy. However, this effect can be mitigated by an education subsidy funded by the progressive tax. Theoretically, public support for government spending on higher education increases when taxation is progressive, especially when income distribution is unequal.

• Conclusion

   For all of these reason, progressive tax us crucial component of the social state and play a central role in the development of and transformation of structure inequality in the modern era and its remain important for ensuring the viability of the social state in the future.

1.                                                                                                    By: Akinola Taofeek
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